Buying Topshop: a good deal for ASOS?

The purchase by ASOS of Arcadia’s Topshop, Topman, Miss Selfridge and HIIT brands looks like a good deal for ASOS. Shareholders thought so, and the ASOS share price rose sharply after the official announcement.

£265m may at first sound expensive for a business without the shops, and the deal even excludes stock (£30m extra). But to build up these brands from scratch could easily cost a lot more. Each brand has its loyal following, with Topshop’s in particular seen as being very strong.

Part of the calculation of value will have been based on cost savings for online keyword searches. ASOS will also buy an archive of mostly positive online reviews for the brands. Although there are well-reported cases of fashion brands that start their life with low cost social media messaging, the reality is that to grow an online business, impressions and clicks need to be bought to move a new fashion brand through its growth phase. ASOS has avoided the costs of rapid growth.

ASOS is buying the brands’ intangible intellectual property but not its tangible assets. This makes a lot of sense. It is retaining 300 staff who will continue the dialogue with customers, manufacturers and distributors. They will need to keep the brands up-to-date and relevant. Existing outlets such as Nordstrom will be a launch pad for further international development of the brands.

Retail property is currently a depreciating asset, but eventually rents will stabilise at a new lower level, and people will return to shops to buy clothes. With many fashion retailers gone from the high street, there will be opportunities to cater for buyers for whom clothes buying is a social and sensual activity that cannot easily be replicated online. Either ASOS may find a well-targeted, lower cost opportunity to return to the high street itself, or there will be a new generation of focused retailers who will make good distribution outlets for its brand ranges.

Will Topshop ever reappear on the high street? Never say never, but it would be in a very different format, reborn as an outlet for a very efficient online operation, rather than the centrepiece of a business that had neglected online before.